Super Retail Group

Weakness in general retail trading has been very well publicised in recent weeks. The budget's impact on consumer sentiment has dramatically affected consumer spending, while mild winter weather has further exacerbated difficult conditions.

We expect Super Retail Group (SUL) is not immune to these conditions and therefore expect further downside risk to market estimates.

Leisure/Sports vulnerable

Weak consumer sentiment has had a meaningful impact on consumer spending. We expect most discretionary categories have been impacted heavily, with apparel particularly vulnerable given the mild winter conditions seen across the country.

This reads through to heightened sales/earnings risk for SUL's Leisure and Sports businesses - particularly given their apparel exposure. While Auto should be more protected given the nature of the category/product, it is still largely discretionary and therefore may also have been impacted.

FY15 equally uncertain

How long these weak industry trading conditions last is the key unknown. Having confidence in FY15 forecasts at this stage is difficult. If a scenario played out where like-for-like sales growth was flat to marginally positive, the resulting negative operating leverage would materially impact the group's earnings. Additionally, the potential for greater discounting would place further pressure on the gross profit margin.

Where's the light?

We still see growth in each of SUL's formats. Admittedly, mining-related weakness (QLD/WA), cannibalisation (1H15) and competitive pressures (from Anaconda) will continue to impact the Leisure business. Positively, SUL's cash flow and net debt position will improve materially from FY16 as capex rolls off and further working capital benefits roll through.

We still rate this business and management, however earnings uncertainty sees us move to a more cautious view. We downgrade our recommendation to Hold with a revised share price target of A$9.64 (previously A$10.95).

More information

Morgans clients can access our detailed research report on Super Retail Group (SUL). If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer(s): Analyst owns shares.

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